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Banking Sector Insight

19.05.2015 | Источник: ICU
Тема: Обзоры по компаниям и отраслям, ICU, Инвестиционный Капитал Украина

The Ukrainian banking is close to hitting the bottom of the economic crisis. Net losses of UAH41.9bn in 2014 and UAH80.9bn in 1Q15 alone have wiped out 23.1% of the banks' overall equity. The IMF has stipulated the measures that Ukraine must take to save the banking system; these will cost the country 7.5% of GDP in 2015.

Gradual recovery expected. In our opinion, the Ukrainian banking sector is close to hitting the bottom of the current crisis in terms of solvency issues. Extraordinary losses in 1Q15 were anticipated and reflect a more realistic estimate of the true level of capitalisation of Ukraine's banks. Cooperation between the authorities and external creditors over the reform of the financial sector have yielded a number of long-awaited pieces of legislation aimed at achieving relative stability and thereby reduced the inherent risks. The banking sector has manage to survive the fall of two of the top 10 banks without significant damage. In our view, the remaining potentially insolvent banks would not cause the collapse of the system.

On the other hand, the current weak recovery could be jeopardised by a further escalation of the war in eastern Ukraine. During the past year, offensive actions by the Russia-backed separatists have triggered turbulence in the FX market and the outflow of deposits. However, our base-case scenario assumes no large-scale conflict but rather continuous destabilisation efforts in eastern Ukraine - a situation that the country's banking system would be able to handle.

Government to save banking system. As we predicted in our December 2014 Banking Sector Insight: In a search of confidence, Ukrainian banks are heavily undercapitalised. The average 1Q15 capital adequacy ratio fell below the minimum required level owing to the cost of more accurate recognition of loan portfolio quality and FX revaluation losses.

The last stress test was based on overoptimistic assumptions, and the current level of capital needs is significantly higher than the originally stated UAH66bn. In our opinion, the Ukrainian banking system requires capital injections totalling UAH150bn to absorb the losses from the current economic downturn. We expect the National Bank of Ukraine (NBU) to conduct the next stress test, which will examine the 20 largest banks to establish their additional capital needs. Since not all of the assessed banks will be able to obtain the required funds, there is a very high probability that large-scale involvement of the state will be necessary.

The latest version of the memorandum signed by the Ukrainian authorities and the IMF puts the cost of saving Ukraine's banking system at 7.5% of GDP (UAH139bn) in 2015. That amount is to be raised by issuing new government bonds during the course of the year. The NBU is allowed to monetise only UAH55bn; the remaining UAH84bn will be needed to recapitalise the existing banks. We expect any major mergers or nationalisations to take place in 4Q15, assuming, that is, the measures stipulated in the IMF memorandum are implemented on schedule.

Reducing risks. The IMF programme stipulates a thorough investigation of excessive related-party lending, which is one of the biggest flaws of the Ukrainian banking system. The country's 20 largest banks are to be assessed using a revised and more demanding approach. We believe that some banks, including Privatbank, are likely to fail the revised test. In such a case, they would be required to present a plan whereby related-party lending is reduced over the next three years. This, of course, assumes that Ukraine honours its obligation to implement the IMF programme.

The IMF programme provides a very comprehensive roadmap for the reform of the Ukrainian banking sector. Currently, both the government and the parliament are trying to meet the deadlines and the intermediary targets stipulated by the programme. However, since the last tranche was disbursed, there have been some delays in implementing the programme amid an increase in the number of populist actions and bills.

Banking sector clean-up intensified. The NBU has introduced temporary administration at Delta Bank and Nadra Bank. Both of these institutions ranked earlier among the top 10 banks in Ukraine by total assets; moreover, NBU had classified Delta Bank as a systemically important institution just two months before it was declared insolvent. The authorities have announced that economic efficiency will be the criterion for deciding whether to nationalize the bank or let it fail. However, the actions taken vis-a-vis both of these banks can be described neither as well-timed nor as consistent with the best interests of the general public.

The Ukrainian government's experience during the last round of bank nationalisations - which took place in 2009 - was largely negative. However, at the same time, the retention rate of money disbursed through the Deposit Guarantee Fund (DGF) has been very low - at just 30-40%. For this reason, the most desirable solution at the current time would be for insolvent banks that have real assets but are unable to raise the required capital to merge with the existing state banks. According to our estimate, the share of government-owned banks could rise from 24% today to 45% by the end of 2015.

Debt restructuring. The Ukrainian government has initiated a comprehensive restructuring of sovereign debt that would include bonds issued by the largest state banks. Ukreximbank has already announced the terms of its US$750m bond reprofiling, which includes an interest-rate increase and no haircut. The "no repayment of the principal" approach is expected to be applied to two bonds issued by Ukreximabank (2016 US$125m and 2018 US$600m) and another two by Oscahbank (2016 US$700m and 2018 US$500m) during the period 2015-18. This would allow to Ukraine to achieve the IMF's External Fund Facility Target 1.

In our view, the terms being offered to Ukrexim's bondholders are favourable and will serve as a guide for further restructurings. However, under those terms investors will not have as much leverage over Ukreximbank as they have had to date (the bank plays a key role in the import and export operations of Ukrainian enterprises). While the economy could withstand the default of Oschadbank, such a development would be undesirable for the authorities because of the negative publicity it would generate within the country.

Privatbank, which is the largest bank in Ukraine, is facing the maturity of its US$200m Eurobond in September and is likely to seek the reprofiling of that debt. Currently, there are no limitations for on-time loan repayments; but there is a risk that capital controls will be tightened. Unlike the state banks, Privatbank has no investments in government bonds and hence would need to obtain liquidity primarily from the local FX market.

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